10-Q: Primis Financial Corp. Reports Mixed Results in Second Quarter 2024 Amidst Economic Headwinds

Primis Financial Corp. experienced a mixed second quarter in 2024, with increased net interest income and decreased noninterest expenses, but a decline in noninterest income and ongoing challenges in the Consumer Program loan portfolio.

Summary

• Primis Financial Corp. reported a net income of $3.4 million for the three months ended June 30, 2024, compared to a net loss of $2.0 million for the same period in 2023.
• For the six months ended June 30, 2024, net income was $5.9 million, a slight decrease from $6.4 million in the same period of 2023.
• Total assets increased to $3.97 billion as of June 30, 2024, up from $3.86 billion at the end of 2023.
• The company's loan portfolio grew to $3.3 billion, a 2.5% increase from the end of 2023.
• Total deposits also saw a modest increase to $3.3 billion, up 2% from the end of 2023.
• The net interest margin was 2.72% for the second quarter of 2024, up from 2.36% in the second quarter of 2023, but down from 2.84% in the first quarter of 2024.
• The allowance for credit losses to total loans was 1.56% as of June 30, 2024, compared to 1.62% at the end of 2023.
• Nonperforming assets represented 0.25% of total assets as of June 30, 2024, compared to 0.20% at the end of 2023.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are some positive aspects, such as increased net interest income and loan growth, the challenges in the Consumer Program loan portfolio and the decline in noninterest income create uncertainty. The company is also in the process of remediating material weaknesses in internal controls.

Positives

• Net interest income increased due to higher lending rates and redeployment of excess cash into higher yielding assets.
• Noninterest income saw growth in mortgage banking and bank-owned life insurance.
• Noninterest expenses decreased due to lower fraud losses, FDIC insurance assessments, and data processing costs.
• The company's net interest margin improved year-over-year.
• The company's loan portfolio and deposits both saw growth in the first six months of 2024.

Negatives

• Noninterest income decreased for the six months ended June 30, 2024, primarily due to a decline in Consumer Program derivative income.
• The Consumer Program loan portfolio continues to experience higher charge-offs and requires a higher allowance for credit losses.
• The net interest margin decreased from 2.84% in the first quarter of 2024 to 2.72% in the second quarter of 2024.
• Nonperforming assets increased slightly from 0.20% to 0.25% of total assets.

Risks

• The company is exposed to interest rate risk, which could impact net interest income.
• The Consumer Program loan portfolio continues to be a source of concern due to higher charge-offs and the need for a higher allowance for credit losses.
• The company is subject to various regulatory capital requirements, and failure to meet these requirements could have a material adverse effect.
• The company is exposed to credit risk, particularly in its loan portfolio, which is concentrated in real estate loans.
• The company is exposed to cybersecurity risks, which could disrupt business and result in the disclosure of confidential information.
• The company is exposed to risks related to the sale of the Life Premium Finance division, including the potential for delays and the impact on future earnings.

Future Outlook

The company expects a pre-tax gain of $4.5 million from the sale of the Life Premium Finance division, net of advisory and legal fees, at the initial closing in the fourth quarter of 2024. The company also anticipates the material weaknesses in internal controls to be fully remediated as soon as possible.

Management Comments

• Management believes that the company meets all capital adequacy requirements.
• Management believes that the company has put effective controls in place to remediate the previously identified material weaknesses, but the controls have not been operating for a sufficient amount of time to conclude that the material weakness has been fully remediated.

Industry Context

The report reflects the challenges faced by many financial institutions in the current economic environment, including rising interest rates, inflation, and the need to manage credit risk. The company's focus on growing its mortgage business and digital deposit platform is consistent with industry trends.

Comparison to Industry Standards

• The company's net interest margin of 2.72% for the second quarter of 2024 is within the range of other regional banks, but the company's performance is impacted by the higher cost of deposits and the need to manage credit risk in the Consumer Program loan portfolio.
• The company's loan growth of 2.5% in the first six months of 2024 is comparable to other regional banks, but the company's growth is concentrated in specific loan types, such as multi-family residential and non-owner occupied commercial real estate.
• The company's nonperforming assets to total assets ratio of 0.25% is relatively low compared to some other banks, but the company's allowance for credit losses to total loans of 1.56% reflects the higher risk associated with the Consumer Program loan portfolio.
• The company's capital ratios are above the minimum regulatory requirements, which is consistent with other well-capitalized banks.

Stakeholder Impact

• Shareholders may be concerned about the decline in noninterest income and the ongoing challenges in the Consumer Program loan portfolio.
• Employees may be affected by the sale of the Life Premium Finance division.
• Customers may be affected by changes in interest rates and loan terms.
• Creditors may be concerned about the company's credit risk and capital adequacy.

Next Steps

• The company will continue to monitor and manage its interest rate risk.
• The company will continue to manage the Consumer Program loan portfolio and its associated credit risk.
• The company will continue to remediate the material weaknesses in its internal control over financial reporting.
• The company will complete the sale of the Life Premium Finance division.

Key Dates

Keywords

financial results, net interest income, loan portfolio, deposits, asset quality, credit losses, mortgage banking, interest rate risk, noninterest income, noninterest expense, Consumer Program, capital ratios, regulatory requirements